The buy to let market is extremely strong in the UK at the moment and is continuously growing. Recent reports have shown that rental income is worth just short of £1 billion a week; a very attractive figure for those looking for an investment. The average monthly private rent in the UK is £874 per month or £702 excluding London.
Therefore, if you manage to acquire a property in the right area and at the right price, renting it out could be a worthwhile venture.
Why is the rental market growing?
The pace of house building is currently moving at snail’s pace meaning the supply of property to buy or rent isn’t likely to change much in the short term. This combined with high house prices and a constrained mortgage lending market ensures that demand for rented accommodation remains strong.
A particular strong target market are the young professionals who are eager to move out of their parent’s home, or have secured a job in a new location, and are not yet in the position to buy a property. Conversely, many young professionals simply do not want to buy yet and enjoy the flexibility that comes with renting. The competition is fierce for rental properties in the right area, with properties being snapped up within days of going on the market, even hours in some instances.
Below are some hints and tips if you are considering buying to rent.
Location & Target Market
An ‘up and coming’ area is the one to aim for; a place that isn’t yet established but is becoming more and more popular. There may be more businesses opening in and around the area, which will give you an indication.
If you are wanting to attract professionals and young working couples, do your research and check out the transport links. Is there a bus service that goes to the city centre? Perhaps there is a train or tram station close by? Maybe even a few trendy bars and coffee shops. If you want to attract students you will be looking at areas either within walking distance of the universities or with good public transport.
The area, type of property and prospective tenants you want to attract all need to correspond to make your investment worthwhile.
Legal Concerns
When buying a property it is wholly advisable to contact a solicitor as early as you can to carry out conveyancing on the purchase. Any buyers who are using a mortgage to purchase the property will need to consult a solicitor to ensure the property has a ‘good and marketable title’ for the lender to lend. You will also incur search fees and stamp duty if your property is over certain thresholds. If the purchase price is under £125,000 you will pay nothing, but if it is between £125,001 and £250,000 you will pay 2%. If you want to splash the cash on a property worth over £1.5 million, you will pay 12%. There are also Land Registry fees to consider.
Renting your property out is managed via an assured shorthold tenancy (AST). It is highly advisable to have a solicitor check your AST as certain legal requirements must be adhered to. If not you may encounter a number of problems, such as when terminating tenancies and dealing with tenancy deposits which need to be protected in a Tenancy Protection Deposit Scheme; if not done correctly this can result in a fine.
All these costs need to be closely considered to ensure that a buy-to-let investment is the right way forward for you.
Other Costs to Consider
Make sure you know what you can actually afford – what is the likely cost of a property you’re looking at and how much rent are you going to raise. Mortgage rates for buy to let properties are almost always higher than residential mortgages; a deposit of over 20% is the norm. What would the maintenance costs of the property be? Remember, your property may not always be occupied by a tenant, but the mortgage still needs paying.
What type of yield will you be making? Yield is the amount of rent received over the year as a percentage of the purchase price. Rent will be your key return from a buy to let property so the yield is important. The higher this is the better. A yield which is greater than the interest payments means that you will be making money.